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IMF’s pact with Kenya that birthed VAT on fuel

James Momanyi @jamomanyi

A commitment by National Treasury Cabinet Secretary Henry Rotich to the International Monetary Fund (IMF) in January 2015 that his ministry would abolish value added tax (VAT) exemptions in the following year has come back to haunt the government as Kenyans feel the pain of increased pump prices and rise of commodity prices.

The IMF was created to protect the stability of financial systems globally by offering loan facilities to countries facing balance of payment problems on affordable terms to stabilise and restore their economic growth while maintaining safe level of reserves.

Treasury had entered into an agreement with IMF for the implementation of  VAT Bill 2013 as a precondition of accessing Stand-By Credit Facility (SCF) of $989.8 million (Sh99.6 billion) aimed at cushioning the economy against unforeseen shocks.

SCF is a programme that provides financing to low income countries facing short term balance of payment needs. It charges low-interest rates as compared to market rates.

Among other things, the IMF had prescribed the scrapping of tax exemption on petroleum products as part of the measures by the government to increase revenues on one side and also reduce the fiscal deficit and hence maintain a low risk of debt stock.

Earlier, in 2013 Parliament passed the VAT Act which introduced VAT on petroleum products such as petrol, diesel, kerosene and natural gas as from September 1, 2013. However, in its wisdom Parliament decided to exempt petroleum products for a period of three years from commencement of the Act.

Essentially, the 16 per cent VAT addition to petroleum products would have commenced as from September 1, 2016. But the exemption was again extended for a further two years through the Finance Bill 2016. This was largely because there was a looming general election in 2017, and the grinding tax could have gone wrong with the government then seeking re-election.

With the election done and dusted, Treasury had no worries in implementing the VAT Act to first mollify the IMF team which held talks with the Treasury from July 23 to August 2, this year on the second review of Kenya’s application for a precautionary Stand-By Arrangement facility.

The country’s request for SBA for another six months, ending September 14, 2018 was approved by the IMF executive board. In their statement, the board gave a rider that although the country has reduced the fiscal deficit to within the programme targets, there were concerns with the underperformance in revenue collection.

“Revenues significantly underperformed, coming in 2.2 per cent of GDP lower than program targets. To meet the deficit target in this context, the authorities rationalised expenditures,” the board said in a statement.

The board also indicated that their discussions with Treasury focused on fiscal policies to achieve the country’s fiscal deficit target of 5.7 per cent of GDP in this financial year, interest rate controls and structural reforms aiming to ensure the sustainability of investment-driven, inclusive growth.

Eyes will now be on the President to see whether he will sign the Finance Bill 2018 passed by Parliament last week, which extends the exemption by yet another two years or he will return it to the House with amendments.

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